ILLEGAL BARGAINS(LEGALITY OF OBJECT)

Chapter 13:

General Information

Illegal contracts = illegal bargains We should steer clear of the term “contract” here,

because………….why?These are held unenforceable for a few reasons.

….to discourage such undesirable conduct ……and to preclude the inappropriate use of judicial

process (waste tax payer money) in carrying out such socially undesirable bargains

This chapter will cover: Agreements in Violation of Statute Agreements Contrary to Public Policy The Effect of Illegality upon Agreements

Violations of Statutes

“An agreement to violate a statute prohibiting crimes, such as murder, robbery, embezzlement, forgery, and price fixing, is unenforceable. Likewise, an agreement that is induced by criminal conduct will not be enforced.”

There are specific areas that the law gives direction to avoid these situations. Licensing Statutes Gambling Statutes Usury Statutes Sunday Statutes

Licensing Statutes

Every jurisdiction has laws requiring licenses to be issued for those who engage in certain professions. Legal Medical Trade Brokerage Contractors Etc.

Licensing Statutes

Why would this be necessary?

What would be the public policy rationale behind these kinds of laws?

What happens if an “unqualified” person begins to engage in a particular professional area?

Regulatory Revenue

A person cannot recover for professional services unless he has the required license, as long as the public policy behind the regulatory purpose clearly outweighs the person’s interest in being paid for his/her services.

This is designed to protect John Q Public!

These laws are in place merely to raise revenue through the issuance of licenses.

This is not meant to protect anyone.

It’s only for the raising of revenue.

Licensing Statutes

Licensing Statutes Gambling Statutes: US Courts

generally do not recognize a contract in which two private parties engage in a wager in which one shall win and the other shall lose depending upon the outcome of an event in which their sole interest arises from the possibility of such gain or loss. Example: Office pools! MARCH

MADNESS!!!!!! Some states allow for some

wagering contracts and tightly manage the gaming industry.

Licensing StatutesUsury Statutes: a law

establishing a maximum rate of permissible interest for which a lender and borrower of money may contract

EXCEPTION: Please notice that there are very few forms of protection against entities like credit card companies from increasing interest rates.

Licensing Statutes

Sunday Statutes: some states have legislation that prohibit certain types of commercial activity on Sunday

Where do we see this?

Could this affect your business? How?

Violations of Public Policy

What does “public policy” mean? Public Policy is the term of art that refers to the majority’s

opinion as to what is in the best interest of the public at large.So what would a violation of this look like?

Perhaps something that is injurious to the public good. Well, that doesn’t really help.

These would be laws the majority creates to provide protection.

Here are areas the text lays out for us. Common Law Restraint of Trade Exculpatory Clauses Unconscionable Contracts Tortious Conduct

Common Law Restraint of Trade

This would be any contract or agreement that eliminates or tends to eliminate competition or otherwise obstructs trade or commerce. Example: Covenant Not

to CompeteBut, wait…..aren’t

those ok and common.Yes, but!

These kinds of restraints are permissible as long as they achieve two things. 1. the purpose of the restraint

is to protect a property interest of the promisee and

2. the restraint is NO more extensive than is reasonably necessary to protect that interest

You’ll find these kinds of restraints mostly in cases dealing with the sale of a business or employment contracts

Sale of a Business Employment Contracts

Many times a contract for the sale of a business will include a clause that requires the party selling the business not to open up a competing business.

Is this ok? Yes, but it has to be

“reasonable.” As long as the clause stipulates

only to a certain amount of time and in a certain area.

The Burger King Case!

Often employment contracts include clauses that prevent employees from competing with their employers while employed and for some time after the termination of their employment.

Is this ok? Yes, but! Often the employer

has to prove that the worker’s competition after employment would damage the employer’s legitimate interest.

Common Law Restraint of Trade

Exculpatory ClausesSome contracts include

clauses that try to excuse a party from any type of liability for harm caused intentionally or recklessly.

This would be a NO NO!Violates public policy!However, contracts can

have clauses that limits someone’s liability from harm surrounding negligent behavior. Usually must be clearly

written and in plain view.

Unconscionable ContractsWhat does unconscionable mean? 1. not guided by

conscience; unscrupulous. 2. not in accordance with

what is just or reasonable: unconscionable behavior.

3. excessive; extortionate: an unconscionable profit

So what would that mean for a contract?

“…..the courts have again demonstrated their willingness to limit freedom of contract to protect the less advantaged from overreaching by dominant contracting parties.”

There are two forms: Substantive Procedural

Substantive Procedural

“……involves the actual terms of the contract, consists of oppressive or grossly unfair provisions, such as an exorbitant price or an unfair exclusion or limitation of contractual remedies”

“bargaining naughtiness”…involves the negotiating

processWas the process fair?Were there important terms

buried in the fine print?Was legal jargon used to

confuse or hide/obscure the true contractual meaning?

Unconscionable Contracts

Tortious Conduct

Very Simple!“A promise to commit

a tort or to induce the commission of a tort is unenforceable on grounds of public policy.”

Effect of Illegality

Big point! Illegal Contracts are not enforceable! They’re not really even contracts!

Neither party can sue the other if the basis of the contractual agreement in deemed illegal.

However!!!!!! There are a few exceptions. Party Withdrawing Before Performance Party Protected by Statute Excusable Ignorance Partial Illegality

Party Withdrawing Before Performance

Party Protected by Statute

A party to an illegal agreement may, prior to performance, withdraw from the transaction and recover whatever she has contributed, if the party has NOT engaged in serious misconduct.

Sometimes an agreement is illegal because it violates a statute designed to protect person in the position of one of the parties.

The statute usually expressly gives the purchaser the right to rescind the sale and recover the money paid.

Effect of Illegality

Excusable Ignorance Partial Illegality

An agreement that appears on its surface to be entirely permissible may, nevertheless, be illegal by reason of facts and circumstances of which one of the parties is completely unaware

Example: Bigamy

A contract may be partly unlawful and partly lawful.

This can be handled one of two ways: 1. the partial illegality can

ruin the whole contract deeming it void OR

2. the illegal portion can be removed and the remainder of the contract can remain

Effect of Illegality

CONTRACTUAL CAPACITY

CHAPTER 14:

Contractual Capacity“A binding promise or

agreement requires that the parties to the agreement have contractual capacity.

So what is it?The law regards everyone

to have contractual capacity UNLESS it deems otherwise.

This chapter is about those groups who have no or little contractual capacity.

Contractual Capacity

We will be examining these specific categories: 1. minors, 2. incompetent persons; and 3. intoxicated persons

Each group has a slightly different level of contractual capacity.

We will address each one separately.

MINORS

What does it mean to be a minor? “a person who has not reached the legal age of

majority” At common law, a minor is an individual who has not

reached the age of 21.When a minor has entered into an agreement

or contract (regardless of whether it is in an executed state or an executory state) it is voidable.

This places the minor (or his/her guardian) in a favored position.

Why?

MINORS

When a minor enters into a contractual agreement it does not mean the contract is void. It is voidable.

That means a minor has the power to do one of two things regarding that particular contract. They are presented with an option.

He or she can DISAFFIRM or RATIFY the contract. DISAFFIRM: avoiding liability or responsibility for a

contractual obligation – this releases the minor from liability on the contract

RATIFICATION: to adopt or affirm ones responsibility and liability to a contractual obligation

DISAFFIRMANCE RATIFICATION

A minor may (either through words or conduct) manifest an intention not to abide by the contract

The disaffirmance must either come at a time during their minor classification or within a reasonable time after they have reached the age of majority.

Sale of a Car!

After a minor reaches the age of majority he/she can affirm their responsibility to a contract.

Important!......only AFTER they reach the age of majority.

This would make the contract binding “ab initio.” (from the beginning)

Once this has been done, it cannot be undone!

It may be express or implied.

MINORS

MINORS

EXCEPTION ALERT!!!!!! Liability for Necessaries

A minor cannot avoid responsibility nor liability for obligations to pay for items considered necessary for the sustaining of life These items would include:

• Food• Shelter• Clothing• Medicine• Etc.

The minor would be required to pay for these contractual obligations, BUT not necessarily the contract price. Only what is reasonable!

MINORS

SIDE-NOTE: many jurisdictions disagree on whether a minor should be responsible and be exposed to contractual liability when he/she has misrepresented their age.

SIDE-NOTE: minors are generally held responsible for torts they commit. However, courts differ on this liability when the tort is so interwoven within a contract. In other words, if a minor enters into a contract and through that contract, commits a tort, are they responsible for that tort?

INCOMPETENT PERSONSWhat does it mean to be

“incompetent” in regards to contractual obligations and capacity?

What does incompetent mean and what would it look like?

The text gives two examples that are most common…..and neither deal with this kind of incompetence.

Persons Under Guardianship Mental Illness or Defect

On occasion the courts will place someone under a court-ordered “guardianship.”

This is to protect and control a person’s property rights.

This means the person under the care of the “guardian” has NO contractual capacity.

Any contract he/she enters is considered VOID.

What about “necessaries?” To a reasonable degree.

Remember, for a contract to be consummated, each party must have a certain level of mental capacity.

If a person is determined to be lacking in this area, he/she may avoid contractual liability.

This avoidance means those contracts were voidable.

It is believed that mentally incapable people cannot comprehend the subject of the contract, its nature, and probable consequences.

INCOMPETENT PERSONS

INTOXICATED PERSONS Intoxicated:

A person may avoid any contract that he enters into if the other party has reason to know that, because of intoxication, he is unable either to understand the nature and consequences of his actions or to act in a reasonable manner.

These contracts are also voidable. They may be ratified once you

“sober-up.” Slight intoxication will not destroy

one’s contractual capacity. IMPORTANT: Upon regaining

your capacity (sobering-up) you MUST either ratify or disaffirm the contract reasonably quickly.

CHAPTER 15: CONTRACTS IN WRITING

“YOU’D BETTER GET THAT IN WRITING!!!”

ARE ORAL CONTRACTS BINDING?• Yes, but!!!!• There are certain kinds of contracts that MUST be

in writing.• WHY?

• Because the law says so!• Also, because it is a public policy issue.

• This chapter deals with three topics:• Types of contracts that MUST be in writing• The Parol Evidence Rule• Rules of Contractual Interpretation

FIRST OF ALL………• Why would certain contract need to be in writing?• Any thoughts?• Clarification of complex contractual terms?• Prevention of fraud?• Transparency in contractual negotiations?• Solidification of contractual meanings and

definitions? Memories can change but contracts are more stable.

• ALL THE ABOVE!

WHAT GOVERNS CONTRACTS IN WRITING?• The Statute of Frauds

• Certain contracts must be effectuated in writing!• Originally referred to as an “Act for Prevention of

Frauds and Perjuries”• Meant to prevent “he said she said”• It is meant to provide guidance in a court of law

when a lawsuit involves some contractual agreement.

• IMPORTANT: remember that there are more contracts that DO NOT fall into the SOF!

STATUTE OF FRAUDS

So what falls

into the SOF?

• Promises to answer for the duty of another

• Promises of an executor or administrator to answer personally for a duty of the decedent whose funds he/she is administering

• Agreements upon consideration of marriage

• Agreements for the transfer of an interest in land

• Agreements not to be performed within one year

PROMISES TO ANSWER FOR THE DUTY OF ANOTHER• AKA: “Suretyship”

• “this provision applies to a contractual promise by a surety (promisor) to a creditor (promisee)to perform the duties or obligations of a third person (principal debtor) does not perform”

• This takes the form of a 3rd party contract• “If my son does not pay for his end of the deal, I will.”• The mother’s promise is said to be a “collateral” contract.

• In other words, her promise is seen as “collateral” to make the deal work for her son.

• The situation arises when there are three (3) people of two (2) contracts.

PROMISES TO ANSWER FOR THE DUTY OF ANOTHEREXCEPTIONS:• Original Promise: the SOF does not apply when the 3rd party

makes an original promise to undertake primary liability.• Example: A mother enters into a contract to have her son’s

yard mowed. VS. A mother promises to pay if her son fails to pay to have his yard mowed.

• Main Purpose Doctrine: when the object or main purpose of the 3rd party’s promise is to gain an economic benefit for themselves than the SOF does not apply• Example: A home builder promises to pay for a contractor’s

debt to Home Depot if the contractor does not make good on his/her obligation. (The home builder has an economic interest in the completion of the house.)

PROMISES TO ANSWER FOR THE DUTY OF ANOTHEREXCEPTIONS:• Promise Made to Debtor: if a 3rd party makes a promise to

make good on a debt to the original debtor and NOT to the creditor than the SOF does NOT apply.• Example: “Son, I will pay for the lawn to be mowed if you

fail to pay.”

PROMISES OF AN EXECUTOR-ADMINISTRATOR…WILLS!• “ this applies to the contractual promises of an executor

of a decedent’s will, or to those of the administrator of his estate if the decedent dies without a will, to answer personally for a duty of the decedent

• If the executor or administrator promises to pay personally for a debt of the decedent, the promise MUST be in writing

• Wills MUST be in writing!• Exception: sometimes people give their wishes while lying

on their death bed.

AGREEMENTS UPON CONSIDERATION OF MARRIAGE

• This does not apply to mutual promises to enter into marriage.

• It applies when other things are promised in consideration of marriage.

• What is another name for this?

• The “Pre-Nup!”

AGREEMENTS FOR THE TRANSFER OF LAND

• ALL promises to transfer, buy, or pay for an interest in land, including ownership interests, leases, mortgages, options, and easements, are within the SOF.

• Exception: Courts may enforce an oral agreement for land is there is clear detrimental reliance.

AGREEMENTS NOT TO BE PERFORMED WITHIN ONE YEAR

• ONE YEAR CONTRACTS• THIS CAN BE

TRICKY!• The SOF requires

that ALL contracts that CANNOT be performed within one (1) year of their making to be in writing.

AGREEMENTS NOT TO BE PERFORMED WITHIN ONE YEAR• In other words, if you enter into a contract and the

performance of each party in the contract cannot be completed within one (1) year, you have to put it in writing.

• The Possibility Test: this is a method the courts use to determine whether it is possible to complete performance within (1) one year.• Important: the enforceability of the contract depends upon

whether the terms of the contract make it POSSIBLE for performance to occur within one (1) year.

• Not based upon “probabilities” nor on “actualities!”• Examples: the bridge contract and a lifetime contract

AGREEMENTS NOT TO BE PERFORMED WITHIN ONE YEAR

• But how do you actually calculate the time for this provision?• The year begins

to run from the time the agreement is made, not from the time the performance is to begin.

SALE OF GOODS & SPECIALLY MANUFACTURED GOODS• Here comes the UCC again (uniformed commercial

goods)• If you enter into a contract for the sale of goods and the

contract price is $500 OR more…..it MUST BE IN WRITING!

• “The UCC permits a seller to enforce an oral contract for goods specially manufactured for a buyer, but only if evidence indicates that the goods were made for the buyer and the seller can show that he made a substantial beginning of their manufacturing prior to receiving any notice of repudiation.”• Why would this be important?

SIDE-NOTES• Modification or Rescission of Contracts within the Statute

of Frauds• “Oral contracts modifying previously existing contracts are

unenforceable if the resulting contract is within the statute of frauds. The reverse is also true: an oral modification of a prior contract is enforceable if the new contract is not within the statute.”

COMPLIANCE WITH THE SOF• In order to be considered effective un the SOF, here are

some things a contract should do:• Specify the parties to the contracts;• Specify with reasonable certainty the subject matter and

the essential terms of the unperformed promises; and • Be signed by the party to be charged or by his/her agent.

• Keep in mind the “writing” can be a multitude of different things:• A receipt, a check, telegram, etc.• The “writing” needs to meet the above level of specificity

and it can be enforced• The Blackacre Situation in the book.

COMPLIANCE WITH THE SOF• Sale of Goods:

• Under the UCC, the SOF is a little more liberally construed• This helps to keep contracts in business from dissolving

needlessly.• The UCC only requires “some form of writing” to be in

existence – must do the following things:• Be sufficient to indicate that a contract has been made

between the parties;• Specifying the quantity of goods to be sold; and• Signed by the party against whom enforcement is sought

or by her authorized agent or broker.• Notice that the price is NOT required

EFFECT OF COMPLIANCE WITH THE SOF• Oral Contract within Statute of Frauds – is unenforceable.• Full Performance – statute does not apply to executed

contracts.• Promissory Estoppel – oral contracts will be enforced

where the party seeking enforcement has reasonably and justifiably relied on the promise and the court can avoid injustice only by enforcement.

THE PAROL EVIDENCE RULE

• What is this and how does it apply within the Statute of Frauds?

• Does this deal with “parol” in the sense of criminal law?

• NO!

THE PAROL EVIDENCE RULE• Why do we even bother writing out contracts in the first

place?• Is it for our amusement?• No.

• We reduce contracts to a writing because we want to prevent……:• Misunderstanding• Confusion• Fraudulent activity• The taking advantage of one person over another• To prevent “He said, She said!”

THE PAROL EVIDENCE RULE• By writing out a contract, each party is declaring that this is

their FINAL REPRESENTATION of their agreement.• In other words, if you want something in the contract, you’

better make sure it’s in the writing or you may be SOL because of the SOF.

• The “RULE:” “when a contract is expressed in writing that is intended to be the complete and final expression of the rights and duties of the parties, parol evidence of prior oral or written negotiations or agreements of the parties, or their contemporaneous oral agreements that vary or change the written contract, are not admissible.”

• The “4 Corners” Rule: if it is not within the 4 corners of the contract, than it doesn’t exist.

EXCEPTIONS!!!!!!!• The Parol

Evidence Rule does NOT apply in the following areas:• A contract that

is partly written and partly oral

• A clerical or typographical error

• Evidence showing a lack of contractual capacity

• In the defense of fraud

• A condition precedent

• Subsequent mutual rescission or modification of a written contract

EXCEPTIONS!!!!!!!• When in

explanation of ambiguous terms

• When used to prove the existence of a separate, distinct contract between the same parties

INTERPRETATION OF CONTRACTS

• The courts will attempt to clear up ambiguity in a contract when it is clear that confusion arises over terms used within the “writing.”

EXAM REVIEWChapter 8: Crime

• What is a crime?• Elements of a crime

• Classifications of Crimes• Felony• Misdemeanor

• What is vicarious liability?• Definitions of the following:

• Larceny• Embezzlement• Fraud• Arson• False pretenses• Robbery• Extortion and Bribery• Forgery

Chapter 9: International Law

• General concepts

• Export Control

• Export Administration Act• Controlled Commodities Act• Arms Export Control Act• International Current Events

Articles – In class discussion• Import Control

• Tariffs – general• Treaties – In general

• GATT• WTO• NATO• NAFTA• EU

• What are some things to consider when developing international sales agreements?

• Definitions of repatriation of profits, expropriation, sovereign immunity, and extraterritoriality

EXAM REVIEWChapter 10: Contracts• What is a

contract?• 4 Components

of a Contract• Contract

Classifications

Chapter 11: Mutual Assent• Components,

Sub-Components and their meanings – be able to apply• Offer and

Acceptance, etc

EXAM REVIEWChapter 12: Consideration • What is it and

what forms can it take?• Components and

Subcomponents• Legal

sufficiency• Bargained

for exchange

Contd.• Definitions and

application of Conditional Promises

• Modification of Preexisting Contract

• Substituted Contract• Exceptions:

• Debt Barred by SOL• Debt Discharged by

Bankruptcy

EXAM REVIEWChapter 13: Illegal Bargains (Legality of Object)• Violations of

Statutes• Licensing

Statutes• Gambling

Statutes• Sunday Statutes

Contd. • Violations of

Public Policy (generally)• Common Law

Restraint on Trade• Exculpatory

Clauses• Unconscionable

Contracts• Tortious Conduct

EXAM REVIEWChapter 14: Capacity• Understand its

implication on the following groups• Minors• Incompetent

persons• Intoxicated

persons

Contd.• Understand

disaffirmance and ratification and exceptions to the Minor rule

• Understand “Persons Under a Guardianship” and Mental Illness/Defect

EXAM REVIEWChapter 15: Contracts in Writing• Statute of Frauds

• Promises to answer for the duty of another

• Promises of an executor or administrator to answer personally for a duty of the decedent whose funds he/she is administering

• Agreements upon consideration of marriage

• Agreements for the transfer of an interest in land

• Agreements not to be performed within one year

Contd.• Parol

Evidence Rule & Exceptions